We attended the Consumer Analyst Group of New York's (CAGNY) annual conference in Florida last week, and came away with the impression of a more predictable, low-growth environment in 2024 with a focus on driving efficiencies through technology. In addition, while some companies seemed open to scaled M&A, we think several years of surprises, increased interest rates, and ongoing uncertainties (geopolitics including several important elections) could lead to a year of restrained risk appetite.

A Return To Some Normalcy After Four Years Of Turmoil

The response to the pandemic caused erratic consumer spending, widespread supply chain disruption, elevated inflation, and materially higher interest rates. Now, companies broadly are assuming moderate, low-single-digit, inflation (mainly in labor costs and logistics, whereas input cost inflation will vary by category, including cocoa prices which have surged). This is a significant improvement from 2022-2023 levels.

Coupled with our view that retailers will tightly manage inventory supports companies' broad 2024 expectations for flat to low-single-digit organic sales growth (including limited pricing and moderately positive volumes) and adjusted operating profits growing above sales, generally in the mid-to-high-single-digit area. Several presenters stated expectations of demand gaining strength in the second half.

Having said that, many companies pointed to risks such as key elections, geopolitical conflict, climate, and cyberattacks that could cause dislocations; however, operations are more resilient after facing significant volatility over the last few years. The Coca-Cola Co.'s CFO indicated that the company needs to have flexibility to pivot and adapt, because there is going to be a surprise, sometime in the coming months.

Higher Media Spending To Spark Consumer Awareness And Communicate Product Attributes

We think companies are planning to increase their use of media for several reasons. Multiple companies have looked to innovate and expand into adjacencies which will be backed by more advertising to increase awareness including Clorox Co. (Hidden Valley dressing into dipping sauces), W.K. Kellogg (Kashi smoothie loops), the Kraft Heinz Co. (Heinz into hot sauce and pasta sauce), and Reckitt (Lysol into both laundry and air sanitizer, Mucinex into sore throat drops). Moreover, we think advertising-led volume growth will be critical to top-line sales expansion in 2024 since it will be harder to raise prices after solid double-digit cumulative increases over the last few years. Industry behemoth Procter & Gamble Co. indicated that volume moved on promotion has moved up, but it's still meaningfully below pre-pandemic levels.

Companies are also personalizing digital messaging to consumers. For example, Clorox has built a content engine which enables it to personalize messages to its 100 million consumer database, thereby increasing its return on advertising. Over 50% of Clorox's advertising is personalized. Similarly, Mondelez is using AI content creation to reach its goal of 90% personalized digital media.

But the advertising focus included a human element too. There were notable celebrity endorsements by Dolly Parton (Conagra Duncan Hines cake and muffin mixes) and an in-person appearance by Shaquille O'Neal (endorsing Hershey's gummy bears, which is the fastest-growing category in the sweets segment for which the company is increasing manufacturing capacity by 50% in 2024). In general, food companies remain focused on the growth potential of snacks, including sweet, salty, and flavored products.

Increased Technology Use To Drive Performance

Nearly every presenter named AI as a key tool used in multiple facets, including accelerating innovation, workforce planning, quality control, and increasing return on investment in personalized advertising on platforms such as TikTok. We think companies will increasingly focus on using AI and other technologies to squeeze out inefficiencies and eliminate waste thereby increasing profitability in a slow-growth environment. This includes increased utilization of sensors on manufacturing/processing equipment to monitor waste, performance, and scheduled needed downtime; connecting to customers and vendors for demand/supply planning, and increasing flexibility and resource allocation. Both Conagra and General Mills highlighted their supply chain achievements.

Additional productivity initiatives that were highlighted include expanding shared service capabilities (Kraft Heinz in India), automating low value-added functions (Hershey), and consolidating operations into lower cost areas (W.K. Kellogg).

Little Concrete Discussion Of Potential GLP-1 Disruptions

Few companies--especially those with portfolios weighted toward high-fat or high-sugar content products--delved deep into the potential for GLP-1 (Glucagon-like peptide-1) medications to disrupt the food and beverage sectors. Past comments from companies point to no appreciable impact thus far. The industry remains convinced that demand for sugary or fatty products will stay elevated as long as it is perceived as an allowable snacking treat. We do not presently factor the potential for GLP-1 medications to disrupt the category into our ratings, though we cannot dismiss the risk of future volume headwinds if several hurdles (mainly the high cost of the medications and supply constraints) diminish.

That said, Conagra--which has a diverse portfolio including a sizable portion that could benefit from increased GLP-1 usage—did offer some comments. In particular, consumption of better-for-you frozen meals—which are portion controlled, provide vegetable nutrition, and are high in protein—increase 8% among GLP-1 users. In addition, its $3 billion snack portfolio includes $2 billion of "permissible snacks". Notably, meat snacks are high in protein and popcorn is a low-calorie, high-fiber food. Conagra says that consumption of these types of foods increases among GLP-1 users.

With Some Exceptions, M&A Will Likely Remain Bolt-On

We came away with the impression that large-scale M&A will be limited given materially higher interest rates, still-high valuations, and ongoing uncertainty including geopolitics.

Having said that, strategic buyers will likely have an advantage over financial buyers (i.e., private equity firms) compared to years past given that the latter will likely be more constrained by higher interest rates. Moreover, potential digital/AI efficiencies could enable strategic buyers to anticipate higher combined synergies, thereby closing the gap on acquisition price. Companies that we think could be open to M&A given their generally good balance sheets and statements at CAGNY include General Mills, Hershey, Mondelez, and Kerry Group.

Rating Developments Since 2023 CAGNY

Of the 19 U.S. consumer products companies we rate, we took five positive rating actions and four negative rating actions over the last year.